Types of Trade Promotion Events

Types of Trade Promotions to Drive Growth for CPG Brands

What is a Trade Promotion?

Trade Promotions are various deals and discounts offered by CPG suppliers to drive growth and sales in retail. The cost of the promotion is absorbed by the supplier, as the retailer passes the savings onto the customer (or sometimes not - we'll get into this later).

Trade Promotion Management (TPM) is the practice of managing the various trade promotions in a CPG supplier, and encompasses a range of activities aimed at effectively managing promotional campaigns, optimizing promotional spending, and maximizing return on investment (ROI).

This guide will walk through the most common types of promotions, and the benefits and drawbacks of each.

Manufacturer Charge-back (MCB)

Manufacturer Charge Back (MCB) deals are promotional events where a retailer purchases a brand's product from a distributor at a reduced rate. The retailer then (hopefully) transfers this discount to the consumer during a planned promotional period. This trade promotion event is deducted off of a future payment.

Creating the MCB event at the distributor level allows the CPG brand to provide the discount to multiple retailers at once, and drive retailers to buy new products that just launched at the distributor level.

However, this process involves arranging the discount with the distributor, rather than directly with the retailer. As a result, this setup can lead to higher-than-expected costs and lower-than-expected discounted prices on the shelf.

Off Invoice (OI)

An OI is type of trade promotion when the CPG manufacturer directly discounts the invoice to the distributor. This discount shows up as a line item on the invoice, which creates a more streamlined process since there aren't any additional steps or chargebacks. OI's incentivize distributors to purchase product and have it in stock prior to a busy period (such as. the holidays).

Off Invoice (OI) Drawbacks

This discount only applies to the inventory that the distributor purchases during the promotional period, which can lead to excessive stockpiling of the discounted products, resulting in a spoilage deduction at a later date, which the CPG brand is responsible for paying.

In addition, the discount is typically not passed down to the end-consumer, so the CPG brand does not drive additional sales volume from the promotion.

Scan backs (Scans)

Scans are promotional events where the discount is applied at the point of sale (POS) to the consumer. These deals are typically measured in dollar amounts rather than percentages and provide brands with greater transparency, as they are directly tied to the final sale of the product. Often, they are supported by documentation that verifies the successful implementation of the promotion at the retail level.

Scan backs directly drive increase volume, since the consumer sees the price reduction instantly and there are little to no admin fees compared to the other types of promotions. In the scan deduction below, the brand is able to track that there were 370 units scanned of chocolate granola, which cost them $247.90.

Slotting Fee

Slotting Fees are payments made by manufacturers to retailers in exchange for stocking their products on store shelves, particularly for new product introductions. These fees compensate retailers for the risk and costs associated with adding new items to their limited shelf space.

These are one time fees, which can vary based on whether the shelf chosen is in high-traffic areas (such as displays), and premium shelf spaces (eye-level shelves). Slotting reduces the margin on new products in the market, but is often a necessary cost of doing business with a retailer.

Free Fills

Similar to slotting, free fills are also used during new product introductions. Free fills are a type of promotion where the CPG manufacturer provides a retailer with free product inventory, eg. the retailer does not pay for the first batch of product, reducing their financial risk while encouraging them to stock and promote the new item.

This is typically a one-time promotion to get the product onto store shelves. After the initial promotion, retailers and/or distributors would need to purchase future inventory at regular wholesale prices (unless other types of promotions are used).Free fill offers are frequently used as part of negotiations to secure shelf placement in competitive retail environments where gaining shelf space can be challenging for newer brands and/or new products.

Everyday Low Price (EDLP)

EDLP is a pricing strategy commonly used at retailers like Sprouts as an ongoing effort to reduce the price while retailers keep their margins. Even though the margins are lower, because of the greater quantity of goods that are moved (higher velocity), more profit is gained through higher volume of goods sold.

Which type of promotion is the best?

Well... it depends, and there's no one right answer! Difference types of promotions can drive various behaviors of consumer spending, and a lot of the time, CPG is a game of pay to play. Slotting fees, free fills, and other promotional fees are "optional", but not really if you want your products to stay on the shelf.

The best thing for CPG brands is to plan and analyze promotions carefully, and understand the ROI of each promotion. Using a powerful trade promotion management software is key to unlocking positive trade investments. We'd love to share more about how we can help at Confido - you know where to find us.